1. This is an appeal filed by the assessee against the revisional order passed by the Commissioner, under Section 263 of the Income-tax Act, 1961 ('the Act') dated 1-12-1982. The facts leading to the present case may be stated as follows.
2. Shri G. Sekhar Babu, Smt. Padmavathi Devi, Shri G. Ravi Kumar together with one Shri Pedda Sekhar constituted themselves as a partnership under the deed dated 1-4-1971 and were carrying on the business as manufacturers and dealers on electronic goods and equipments under the name and style of Whitefield Industrial Corporation at No. 2, Whitefield, Main Road, Bangalore. The land covered by survey Nos, 103, 104, 105, 107, 108, 109, 110, 111, 112, 113, 114, 115 and 116 in Seghalli, Bidara-halli Hebli, Hoskote Taluk, Bangalore district was originally purchased Krishna Mining Co., Goginenipuram, Gudur, Nellore district. From the said firm Whitefield Industrial Corparation, purchased the said property under a sale deed dated 15-5-1972 and got it registered as document No. 839 of 1972-73 in the sub-registry, Hoskote. Out of the four partners mentioned above, Shri Pedda Sekhar died on 9-7-1977. The three remaining partners were continuing their business in partnership under the deed dated 15-7-1977. They wanted to set up industries mainly connected with the manufacture of electronic equipments. For the said purpose, they wanted to convert the property which they had purchased as industrial plot.
They approached the concerned authority for the said purpose. The Special Deputy Commissioner, by his order No. B. DIS. ALN. S.R. 20 (205 of 1976-77) permitted conversion of the schedule property for industrial purposes subject to payment of conversion fee of Rs. 4,000 per acre. The said firm of three partners paid Rs. 5,000 in order to augment its capital and with a view to improve its business and for other reasons, they enlisted three more partners into the firm under the deed of partnership dated 1-4-1979. The newly entered partners are G. Pitcheswara Rao, G. Seshagiri Rao and G. Mohan Rao. Now, we are concerned with Shri G. Seshagiri Rao (HUF) in this appeal. The copy of the partnership deed dated 1-4-1979 is furnished at pages 24 to 30 of the paper compilation filed before us. Shri G. Seshagiri Rao was holding 16.66 per cent share in the partnership firm Whitefield Industrial Corporation on 23-11-1979, the land which was originally purchased for consideration of Rs. 52,500 under the sale deed dated 15-5-1972 referred to above and for which in November 1979 conversion fees of Rs. 2,32,234 was paid. The land was revalued at Rs. 12 lakhs.
Originally, Shri G. Seshagiri Rao invested a capital of Rs. 47,964. On revaluation of the land an amount of Rs. 1,52,036 was credited to his capital account. The break up of Rs. 1,52,036 is arrived at as follows-Cost of the land 52,550Conversion fee paid 5,000Conversion fee paid in Nov. 1979 2,30,234 -----------Revaluation of the land 12,00,000 ----------- There is again reconstitution of the firm on 23-11-1979 as per the deed dated 24-11-1979. Under the reconstitution three more partners were admitted, to the benefits of the firm. Conversion of agricultural lands into non-agricultural lands was complete by 22-11-1979. The land was revalued at Rs. 12 lakhs on 23-11-1979. One day after revaluation, i.e., on 24-11-1979 there took place the above said reconstitution of the firm under which three more partners were admitted as partners of the firm. The assessee retired as partner of the said firm from 20-2-1980 with the consent of all other partners after having received a sum of Rs. 2 lakhs by way of demand draft. In token of having received Rs. 2,00,000, the assessee, had given the following receipt : Received Rs. 2,00,000 (Rupees two lakhs only) (by way of demand draft) only towards the amount due to me on Whitefield Industrial Corporation, Whitefield, Bangalore district. Nothing more is due to me from the co-partner of the firm.20-2-1980.
Sd/-Whitefield (G. Seshagiri Rao) 3. The assessee filed a return for the assessment year 1980-81 for which the previous year ended by 31-3-1980 disclosing total income of Rs. 45,730 and agricultural income of Rs. 15,000. A note was submitted along with the return wherein the assessee returned nil income under the head 'capital gains' with the remark as per the note submitted.
True copy of the note submitted was furnished at page 18 of the paper compilation and it is extracted as under : N.B. : I was a partner with a 1/12th share in the firm of Whitefield Industrial Corporation, Whitefield, Bangalore district. A reconstitution had taken place on 23-11-1979 as per deed dated 24-11-1979; I had retired from the said firm on 20-2-1980 with the consent of all the other partners having received a sum of Rs. 2,00,000 by way of a demand draft. I had also passed a receipt in token of my retirement from the said partnership stating therein that nothing more was due to me from the co-partners. A true copy of the receipt as passed on by me on my retirement on 20-2-1980 is herein enclosed. I was also formerly a partner in the said firm on the basis of the partnership deed dated 1-4-1979. Since it is a case of pure and simple retirement by receiving the amount due as per the books of the firm, it does not amount to a transfer of property within the meaning of Section 2(47) of the Act. Hence no question of capital gain arises (vide 115 ITR 95 at page 116 in re : CIT v. Tribhuvandas G. Patel.
The ITO completed his assessment under Section 143(3) of the Act whereunder he had determined the total income of the assessee at Rs. 57,730 and agricultural income at Rs. 15,000 as per his assessment order dated 10-12-1980. The ITO had not computed any income under the head 'capital gains' under the said assessment dated 10-12-1980.
4. On 19-3-1981, the ITO addressed a letter to the assessee asking for certain information regarding the eight points listed out in his letter. It is specifically stated that the information was relating to his income-tax assessment for the assessment year 1980-81 and it was required to answer an audit objection. Copy of the said letter is furnished at page 20 of the paper compilation. The assessee sent a reply under date 30-4-1981. Photostat copy of the reply is furnished at pages 21 and 22 of the paper compilation. On 25-10-1982, the Commissioner gave a notice of revision under Section 263 wherein, it is alleged that originally the assessee invested an amount of Rs. 47,960 but whereas it had received a sum of Rs. 2,00,000 when it had retired from the partnership. It is stated that the partnership did not dissolve on the assessee's retirement but there was only a change in the constitution of the firm. Therefore, the learned Commissioner felt that under the circumstances, any relinquishment of interest in the firm tantamounts to transfer within the meaning of Section 47 of the Act. Hence, the learned Commissioner felt that the difference between the amount invested by the assessee in the firm and subsequently received by the assessee should be brought to tax under the head 'capital gains'. By his failure to bring such an amount to tax under the head 'capital gains', the ITO's assessment order dated 10-12-1980 became erroneous and prejudicial to the interest of the revenue and, therefore, he gave notice to show cause by the mistake should not be rectified by him. Copy of the notice under Section 263 dated 25-10-1982 is furnished at pages 31 to 33 of the paper compilation filed before this Tribunal. Copy of the undated reply to the show cause notice is furnished at pages 34 to 36 of the paper compilation filed before us.
The assessee contended that on 23-11-1979 when the assets were revalued in the books at Rs. 12 lakhs as against the earlier book value of Rs. 52,500 and surplus of Rs. 1,52,036 was credited to the assessee as his share on revaluation, the surplus arising to the assessee cannot be assessed as capital gains as no profit arises by mere revaluation. On 20-2-1980, the assessee was paid an amount of Rs. 2,00,000 which was standing to his credit in his capital account. Nothing more was paid than what was standing in his capital account. Therefore, by a payment of Rs. 2,00,000 on retirement, there is no transfer of any capital asset and no capital gains can arise. It is further argued that the assessee had not executed any deed relinquishing his rights in the partnership firm. It is also argued that retirement from the firm on receipt of money do not amount to transfer within the meaning of Section 2(24) of the Act. Lastly, it is contended that the action under Section 263 is ab initio void and illegal. In support of the above contentions, the assessee relied upon various decisions cited in the impugned order of the learned Commissioner. After considering the objections as well as the decision cited on behalf of the assessee, the learned Commissioner did not agree with any of the contentions advanced on behalf of the assessee. The learned Commissioner held that one important feature in this case is that all the relevant dates fall within the accounting period in the assessment year 1980-81. It is said on 1-4-1979, the assessee became a partner by introducing a capital of only Rs. 4,000 and the introduction of the capital is held to be a capital asset as defined under Section 2(14). As per the Gujarat High Court decision in CTT v. Kartikey V. Sarabhai  131 ITR 42, it is held when an individual introduces a capital asset and becomes a partner, there is a transfer of the assets to the firm. So the learned Commissioner held that on 1-4-1979, there was a transfer of a capital asset by the assessee to the firm in which he became a partner. He agreed with the assessee's contention that mere revaluation of capital assets, no profit arises and no capital gains ensue. But, he held that profit arose to the assessee on his retirement from partnership on 20-2-1980 and the ITO according to the Commissioner, failed to consider this aspect of the matter. The learned Commissioner held further that it is well settled that if the ITO has not borne in mind all the facts and circumstances of the case, the relevant provisions of the Act and the relevant case law that by itself renders his action erroneous and prejudicial to the interest of the revenue. According to the Commissioner, the ITO failed to apply his mind to the very important aspect, namely, that the assessee's entry into partnership firm, the revaluation of partnership assets and the retirement from the partnership, all fell within the same accounting period. He also failed to consider, according to the Commissioner, whether there is a transfer of capital asset, when some capital was brought into the partnership.
He. also held that the ITO failed to bear in mind the decision of the Gujarat High Court in Kartikey V. Sarabha's case (supra). According to the assessee's counsel the decision of the Bombay High Court in CIT v.Tribluvandas G. Patel  115 ITR 95 is distinguishable on facts though the ratio enunciated by it is fully applicable to the facts of the case. The learned Commissioner held that there is nothing to show that the ITO had appreciated the distinguishable features in the facts of this case vis-a-vis the facts stated in Tribhuvandas G. Patel's case (supra). Therefore, ultimately, he had set aside the assessment of the ITO and directed the ITO to redo the assessment after giving adequate opportunity to the assessee to be heard. He was further directed to bear in mind the facts and circumstances of the case the relevant provisions of the Act and various case laws discussed in his order while redoing the assessment.
5. As against the impugned order dated 1-12-1982 passed by the Commissioner, the present appeal is brought before us. The main contention in this appeal is that the assessment of the ITO dated 10-12-1980 is not in any way erroneons or prejudicial to the interests of the revenue. On the other hand, it is correct according to law. In those circumstances, the orders passed by the learned Commissioner under Section 263 are quite unwarranted and merit annulment. We have heard Shri S. Balasubrahmanyam, learned advocate for the appellant and Shri N. Santhanam, learned departmental representative. The main question at issue is whether there is any transfer or relinquishment of the assessee's rights in the partnership firm, viz., Whitefiled Industrial Corporation involved in the way in which the assessee retired from the partnership after accepting Rs. 2,00,000 on 20-2-1980.
At page 23 of the paper compilation the extract of both the capital account as well as current account of Shri G. Seshagiri Rao is furnished and they are as follows-Capital Account : Rs. Rs.1-4-1979 By cash - - 4,00018-2-1980 To D.D.'s issued 2,00,000 -20-2-1980 By Current account - 1,96,000 2,00,000 2,00,000Current Account: Rs. Rs.21-11-1979 By cash - 43,964 By share in revaluation20-2-1980 To capital account 1,96,000 - --------- -------- As can be seen from the above account, Shri G. Seshagiri Rao brought Rs. 4,000 in cash when he claimed admittance into partnership on 1-4-1979. Again on 21-11-1979, on eve of conversion of land from agricultural land into industrial land to meet the conversion charges.
Shri G. Seshagiri Rao perhaps brought towards his share an amount of Rs. 43,964. After the land, is revalued, the one-sixth share of Shri G.Seshagiri Rao came to Rs. 1,52,036 and this enhancement was credited in his current account and the total of the current account, namely, Rs. 1,96,000 was credited to the capital account and his total in the capital account came to Rs. 2,00,000. At the time of retirement, Shri G. Seshagiri Rao was given a demand draft for Rs. 2,00,000. From the analysis, it appears that whatever amount which stood in his capital account only was withdrawn. The main question is whether in such an event any transfer of the interest of Shri G. Seshagiri Rao to the other partners of the firm is involved. In Lindley on Partnership, 13th edition, under the heading 'stamp on assignment by outgoing partner', the following statement of law occurs : But if the retiring partner, instead of assigning his interest, takes the amount due to him from the firm, gives a receipt for the money and acknowledges that he has no more claims on his co-partners, they will practically obtain all they want ; but such a transaction, even if carried out by deed, could hardly be held to amount to a sale ; and no ad valorem stamp, it is apprehended, would be payable. (p. 475) This statement of law was interpreted by Justice Tulzapurkar in the Bombay High Court in Tribhuvandas G. Pate's case (supra), their Lord-ships held that there are two modes in which a partner can retire and they are stated to be as follows : ... In the first place, a retiring partner while going out and while receiving what is due to him in respect of his share, may assign his interest by a deed or he may, instead of assigning his interest, take the amount due to him from the firm and give a receipt for the money and acknowledge that he has no more claim on his co-partners.
The former type of transactions will be regarded as sale or release or assignment of his interest by a deed attracting stamp duty while the latter type of transaction would not. In other words, it is clear, the retirement of a partner can take either of two forms and apart from the question of stamp duty, with which we are not concerned, the question whether the transaction would amount to an assignment or release of his interest in favour of the continuing partners or not would depend upon what particular mode of retirement is employed and as indicated earlier, if instead of quantifying his share by taking accounts on the footing of notional sale, parties agree to pay a lump sum in consideration of the retiring partner assigning or relinquishing his share or right in the partnership and its assets in favour of the continuing partners, the transaction would amount to a transfer within the meaning of Section 2(47) of the Income-tax Act... (pp. 116-17) So from the above, it is clear that if the interest of the retiring partner is either released or assigned by a deed then it amounts to a transfer within the meaning of Section 2(47). But, if instead of the above mode, the retiring partner take the amount due to him from the firm and give a receipt for the money and acknowledges that he has no more claim on his co-partners, it does not amount a transfer within the meaning of Section 2(24). We have already extracted the receipt given by Shri G. Seshagiri Rao in favour of Whitefiled Industrial Corporation after receiving demand draft for Rs. 2,00,000. In that receipt, he acknowledged the receipt of the amount due to him from the firm and further acknowledged that he had no more claims on his co-partners in the firm. Therefore, the present is a case directly covered by one of the modes of retirement contemplated by the Bombay High Court in Tribhuvandas G. Patel's case (supra). Therefore, according to that decision, it does not amount to a transfer. It is noteworthy that the land was not brought in by Shri G. Seshagiri Rao as his capital. On the other hand, the land was purchased by the firm itself and it constituted the property of the firm even before Shri G. Seshagiri Rao was admitted as a partner. Thus, there is no question of transferring his interest in favour of his other partners in the firm. In CIT v. L.
Raghu Kumar  141 ITR 674 (AP), Amareswari, J. held the law as follows as per the headnote given of the decision : ... For the purpose of Section 45 of the Act no distinction can be drawn between an amount received by the partner on dissolution of the firm and that received on his retirement, since both of them stand on the same footing. Therefore, the amount received by a partner from the partnership in excess of the capital and profits standing to his credit in the parinership at the time of retirement cannot be construed as 'capital gain under Section 45 of the Act inasmuch as there is no 'transfer' within the meaning of Section 2(47) of the Act and such excess is not exigible to tax on capital gains. (p. 675) 6. We are bound by the decision rendered by the Andhra Pradesh High Court. The above decision is clearly in favour of the assessee. It is unequivocal in its declaration. It is clearly stated that for the purposes of Section 45 of the Act, no distinction can be drawn between the retirement of a partner from firm and complete dissolution of the firm. Therefore, in view of the clear legal position, the order of the Commissioner (Appeals) under Section 263 appears not to be correct.
Therefore, we annul the order and maintain the assessment order of the ITO dated 10-12-1980.